Option spread execution

RedDuke · Oct 25, 2011

Quote from MTE:

I'm pretty sure SPX options are more liquid than ES. Also the screen market in SPX is generally very wide, wile the actual market (i.e. off-screen) is much tighter and you can get better fills.

Hi MTE,

Can you please explain what do you mean by screen market vs actual market.

Thanks,
redduke

FSU · Oct 25, 2011

Quote from RedDuke:

Hi MTE,

Can you please explain what do you mean by screen market vs actual market.

Thanks,
redduke

The SPX is unique in the options world. While other option pits have multiple Market Makers sending quotes, the SPX has only one. This results in very wide quotes as this MM has no incentive to quote tightly. He does not want to get picked off if the market moves quickly. If an order comes in between the markets, all the MM's have an opportunity to get it.

Individual orders can be placed between the markets my brokers/customers. If the order is held by the "book" it can by traded electronically and instantly (as can the market quoted by the single MM) If the order is held by a broker, it will have to be traded with him. This requires getting his attention, etc. This is why some trades a customer is trying to hit may take 2 mins to fill, while others are filled instantly.

The quotes submitted by the designated MM are quite wide, but the "inside market" is usually quite tight. This is the market the options will really trade at. Their width depends on what is going on in the pit at the time, in terms of volatility, number of participants present, etc. The larger traders will call the pit and broker will get them the "real" quote. Smaller traders need to enter an order in the middle of a quote, and slowly move it if they are not filled. Try and estimate the real middle first. For example if out of the money puts are quoted 2 dollars wide, but one of them is quoted 1 dollar wide, it may have a single order tightening that strike so you would place your order accordingly.

MTE · Oct 25, 2011

Quote from FSU:

The SPX is unique in the options world. While other option pits have multiple Market Makers sending quotes, the SPX has only one. This results in very wide quotes as this MM has no incentive to quote tightly. He does not want to get picked off if the market moves quickly. If an order comes in between the markets, all the MM's have an opportunity to get it.

Individual orders can be placed between the markets my brokers/customers. If the order is held by the "book" it can by traded electronically and instantly (as can the market quoted by the single MM) If the order is held by a broker, it will have to be traded with him. This requires getting his attention, etc. This is why some trades a customer is trying to hit may take 2 mins to fill, while others are filled instantly.

The quotes submitted by the designated MM are quite wide, but the "inside market" is usually quite tight. This is the market the options will really trade at. Their width depends on what is going on in the pit at the time, in terms of volatility, number of participants present, etc. The larger traders will call the pit and broker will get them the "real" quote. Smaller traders need to enter an order in the middle of a quote, and slowly move it if they are not filled. Try and estimate the real middle first. For example if out of the money puts are quoted 2 dollars wide, but one of them is quoted 1 dollar wide, it may have a single order tightening that strike so you would place your order accordingly.

What he(she) said.

RedDuke · Oct 25, 2011

Quote from FSU:

The SPX is unique in the options world. While other option pits have multiple Market Makers sending quotes, the SPX has only one. This results in very wide quotes as this MM has no incentive to quote tightly. He does not want to get picked off if the market moves quickly. If an order comes in between the markets, all the MM's have an opportunity to get it.

Individual orders can be placed between the markets my brokers/customers. If the order is held by the "book" it can by traded electronically and instantly (as can the market quoted by the single MM) If the order is held by a broker, it will have to be traded with him. This requires getting his attention, etc. This is why some trades a customer is trying to hit may take 2 mins to fill, while others are filled instantly.

The quotes submitted by the designated MM are quite wide, but the "inside market" is usually quite tight. This is the market the options will really trade at. Their width depends on what is going on in the pit at the time, in terms of volatility, number of participants present, etc. The larger traders will call the pit and broker will get them the "real" quote. Smaller traders need to enter an order in the middle of a quote, and slowly move it if they are not filled. Try and estimate the real middle first. For example if out of the money puts are quoted 2 dollars wide, but one of them is quoted 1 dollar wide, it may have a single order tightening that strike so you would place your order accordingly.

Hi FSU,

Thanks for a reply. So, what I see on Interactive brokers feed, are the quotes from that one MM?

Is there any way to see what others are quoting in between big b/a spread?

I want to execute credit spreads, and I would need to "test" the fill on both legs, what is the best way to execute such strategy?

What is 100-500 points OTM puts real b/a spread on average, during normal markets?

Best Regards,
redduke

FSU · Oct 25, 2011

Quote from RedDuke:

Hi FSU,

Thanks for a reply. So, what I see on Interactive brokers feed, are the quotes from that one MM?

Is there any way to see what others are quoting in between big b/a spread?

I want to execute credit spreads, and I would need to "test" the fill on both legs, what is the best way to execute such strategy?

What is 100-500 points OTM puts real b/a spread on average, during normal markets?

Best Regards,
redduke

The quotes you see are the only ones anyone can see. No way to know other Market Maker quotes except with the method I described in my last post.

If you want to execute a spread, put the order in as a spread. The spread will most likely be sent to the COB (complex order book) This is essentially an electronic auction place for spreads. The market for an out of the money put spread would be quite tight, probably about .10 to .15 wide (even if the individual options are $2 wide. Each broker has different parameters on how a spread order is sent to the cob (size, etc.), if not sent to the cob it will go to a broker who will hold the order. IB has their own brokers in this pit. I donât know their parameters on how long or when their brokers will hold the orders.

Note the MM's cannot leave spread orders in the COB, the can only interact with spreads that are already there.

You can see a list of the spreads in the cob on the cboe web site

RedDuke · Oct 25, 2011

Quote from FSU:

The quotes you see are the only ones anyone can see. No way to know other Market Maker quotes except with the method I described in my last post.

If you want to execute a spread, put the order in as a spread. The spread will most likely be sent to the COB (complex order book) This is essentially an electronic auction place for spreads. The market for an out of the money put spread would be quite tight, probably about .10 to .15 wide (even if the individual options are $2 wide. Each broker has different parameters on how a spread order is sent to the cob (size, etc.), if not sent to the cob it will go to a broker who will hold the order. IB has their own brokers in this pit. I donât know their parameters on how long or when their brokers will hold the orders.

Note the MM's cannot leave spread orders in the COB, the can only interact with spreads that are already there.

You can see a list of the spreads in the cob on the cboe web site

Thank you very much for the answer.

FSU · Oct 25, 2011

Quote from RedDuke:

Thank you very much for the answer.

Your welcome,

You also may want to look at the SPXPM options. These are the same as the spx options, but they expire in the afternoon. They are all electronic and have much tighter quoted markets.

RedDuke · Oct 25, 2011

Quote from FSU:

Your welcome,

You also may want to look at the SPXPM options. These are the same as the spx options, but they expire in the afternoon. They are all electronic and have much tighter quoted markets.

I just checked SPXPM and there is a lot less volume than SPX. Wish SPX was all electronic.

Is there any vendor/broker that might show COB?

Regards,
redduke

RedDuke · Oct 25, 2011

FSU,

I just saw some of your earlier posts that SPX was potentially moving to C2 for fully electronic trading. What is the latest on this switch?

Thanks

FSU · Oct 25, 2011

Quote from RedDuke:

I just checked SPXPM and there is a lot less volume than SPX. Wish SPX was all electronic.

Is there any vendor/broker that might show COB?

Regards,
redduke

Yes, much less volume as it just start trading a few weeks ago. Still very tight quotes, so I don't think you would have a problem with fills. I am trading in it today and have been getting filled in between the tight quotes.

The only two vendors that I know of that show the cob are WEX (Wolverine Execution) and ITG. You can see the cob on the CBOE here http://www.cboe.com/cob/cob.aspx and enter an order through any broker. If that broker sends the order to the cob, you will be filled instantly.